Influence of Competition and Shadow Banking On Banking Profitability in Indonesia

International Journal of Economics, Business and Accounting Research (IJEBAR)
Peer Reviewed – International Journal

Vol-5, Issue-2, June 2021 (IJEBAR)
E-ISSN: 2614-1280 P-ISSN 2622-4771
https://jurnal.stie-aas.ac.id/index.php/IJEBAR
INFLUENCE OF COMPETITION AND SHADOW BANKING ON

BANKING PROFITABILITY IN INDONESIA
Baetyka Nur Rifawati

Universitas Sebelas Maret
Email: tyka2102@gmail.com
Abstract Competition between banks can lead to various innovations and expansions
in the banking sector that ultimately relate to the profitability that will be
obtained by banks. Profitability is one of the important indicators
commonly used to know the performance of banks in gaining profits in a
country in a certain period. This study aims to analyze the influence of
competition, shadow banking, and other determinant factors on the
profitability of banks in Indonesia. The population studied in this study was
conventional banks listed on the Indonesia Stock Exchange during the
period 2014-2019. Sampling in this study using a purposive sampling
method. Data analysis methods use multiple regressions. The results of the
analysis in this study show that competition and company size has a
positive and significant effect on the profitability of banks. Credit risk
negatively and significantly affects bank profitability, while shadow
banking has a positive but insignificant effect on bank profitability. Based
on these results, it can be concluded that the level of competition,
ownership of assets, and risk of bad credit greatly affect the profitability of
the bank.
Keywords: competition, shadow banking, bank profitability
1. Introduction
The banking sector is one of the sectors that play an important role in building a country's
Economy (Budiyono et al, 2021). This is inseparable from the function of banking institutions
that act as financial intermediary institutions that distribute funds from parties that have excess
funds to parties that need funds (Berlian, 2017). With this role, the bank distributes funds to
the real sector to boost economic growth so that the bank has become an institution that
contributes to the development of the country's economy. In addition to being an intermediary,
the bank also serves as a provider and provider of services in the field of finance and payment
traffic. In Indonesia itself, its economic activities cannot be separated from banks. Almost all
sectors require banks in their activities, be it in terms of payments or terms of funding needs.
Therefore, banks must maintain their performance for the economy to remain stable.
At this time, competition between banks is getting tighter. This is characterized by the
number of branch offices opened in each area, the emergence of new products with all kinds
of attributes owned by each bank such as providing high-interest rates, credit guarantees,
gifts, online facilities, phone banking, self-service cash machines (ATMs), and other
International Journal of Economics, Bussiness and Accounting Research - IJEBAR Page 541
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facilities. Based on data from BPS (Central Bureau of Statistics), until the end of 2019, there
are 96 conventional commercial banks in Indonesia with industries that are still highly
concentrated in commercial banks with a total of 4 banks.
Competition between banks can lead to various innovations and expansions in the
banking sector that ultimately relate to the profitability that will be obtained by banks.
Competition in the banking sector is considered one of the indicators that can lead to a decrease
in the level of banking margins. This is because of the large number of banks in the market so
that banks compete with each other in offering banking products at lower prices to get more
customers. But for consumers, this is considered profitable because consumers will get a lower
price as well.
Experts have empirically examined the economic role of banking competition. Empirical
findings suggest that banking competition has both positive and negative effects, and it is
difficult to determine which one ultimately dominates (Yong, 2017). Tan and Floros (2014)
examined the link between risk, profitability, and competition in China's banking industry.
The results showed that there is a significant and negative influence between the competition
to bank profitability in China, which is in line with the SCP (structure-conduct-performance)
theory.
In addition to the interbank competition, the phenomenon that is currently developing in
the Indonesian banking world is the Shadow Banking phenomenon. According to Tang & Wang
(2016) Shadow banking is a term that refers to financial intermediation institutions that
facilitate the formation of credit in the financial system. It can also be interpreted as the
activities of financial institutions that have not been staggered by regulation. Bank Indonesia
(BI) defines shadow banking as a non-bank financial institution that performs functions like
banking, such as securities companies, private equity, pension funds, insurance, financing
institutions, to microfinance institutions (MFIs).
According to Regina (2018), Shadow banking provides similar services to commercial
banks such as providing credit throughout the financial system. Here as a non-depository
institution, Shadow banking obtains its funds through several means, namely equity, bond
issuance, banking loans as well as short-term funding activities, where borrowers provide
collateral as collateral against loans provided. Shadow banking is also described as a network
of financial instruments such as asset-backed securities, derivative loans, money market
mutual funds, repurchase agreements, and others (Gerding, 2011). In a simpler sense, shadow
banking is a rival bank in credit intermediation to households and businesses (Zoltan, 2012).
According to Barth (Regina, 2018), although the role of shadow banking is still limited, its
presence is considered capable of contributing to the economy through diversification of
financial services (Iin Emy and Anik, 2020). When diversification occurs in financial
products, it is considered to reduce the risk that triggers increased investment and savings.
Of course, the increasing financial activity, activity in the real sector, and the economy will
also increase. However, shadow banking financial activities can also be a source of systemic
risk. This is because, in its activities, shadow banking is not regulated and supervised like a
commercial bank.
Yong (2017) examined the influence of competition and shadow banking on the
profitability of the banking industry in China. The results showed that shadow banking
contributed to the increase in profitability of China's commercial banks. Related to the theory
of financial innovation, shadow banking as a form of financial innovation can lower transaction
costs and taxes to increase returns (Tang, 2016).
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Profitability is the most important indicator for measuring a bank's financial

performance. Profitability is the ability of the company to generate profit over a certain
period. Profitability also has an important meaning in the effort to maintain the company's
long-term survival, because Profitability shows whether the business entity has good
prospects in the future. Profitability can be interpreted as one of the indicators to measure the
performance of a company (Yuanita, 2019).
Profitability has information to know the amount of profit earned by the company in a
certain period and the productivity of the use of company funds used both loan capital and
own capital that can be used by investors and prospective investors as the basis for decision
making in making investments. Profitability is not only important for investors and potential
investors but it is also important for management to set targets and evaluate the effectiveness
of the company's management as well as be a public assessment of the company.
According to Yong's research (2017), most of the research found that bank profitability is
significantly influenced by bank size, bank liquidity, bank capital, bank credit risk, bank
efficiency, and bank diversification. Empirical studies on bank profitability can be classified
into five groups according to methodology. To be more specific, some preliminary studies
use ordinary least square estimates. Four of these studies focused on investigating the U.S.
banking industry and one study evaluated profitability in the European banking industry. The
results reported that the profitability of U.S. banks was significantly influenced by bank size,
bank risk, and market share as well as by-product differentiation. The second study group
used Granger's causality test to test profitability in the U.S. banking industry and its findings
showed that bank profitability was significantly impacted by capital levels. The third research
group used fixed effect estimation to assess the determinants of bank profitability. The study
focused on investigations using bank samples from European countries, the Philippines and
Portugal, as well as developed and developing countries. The results showed that the bank's
profitability was significantly affected by bank risk, bank capital, and competition levels. The
fourth study group used the GMM (Generalized Method of Moments) to estimate the
determining factors of bank profitability. The results of the study showed that bank
profitability is significantly influenced by the risk of credit, liquidity, capital, efficiency,
diversification, and income levels of a country. Lastly, the fifth study group used a
combination of two methods (GMM and OLS, GMM, and fixed effect estimation) to
investigate bank profitability determinants. The results showed that credit risk, capital, and
competition levels affect the bank's profitability.
This research is the result of modifications from previous studies, namely research
conducted by Yong (2017) and Tang (2016). The Lerner Index is used to measure the level of
competition between banks and uses net fees and commissions as a proxy to measure shadow
banking. In addition, this study used several bank-specific variables such as credit risk, bank
size, bank diversification, capitalization rate, and overhead cost to assess the determinant of
banking profitability. The two researchers also used conventional commercial banks as
research objects. Based on the description above this study will analyze the influence of
competition and shadow banking on the profitability of banks in Indonesia. This study will be
reviewed at commercial banks in Indonesia.
Competition is a condition where several parties compete for something. In a competitive
market, banks have little market power. The magnitude of market forces in the banking sector
will cause banks to increase lending interest rates to gain high profitability. Hope (2013)
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found that there is a positive relationship between market forces as measured by the Lerner
index and ROA.
According to Chortareas (2011), competitive markets resulted in a low spread in the
Latin American banking sector. Bank profitability is influenced by the intensity of
competition in the banking market, this has been proven by Smith (Febrina, 2015) who found
a decrease in profitability in the banking industry with a high level of competition. Yuanita
(2019) uses the Lerner index for competition measurement. The regression results show that
the Lerner index has a positive relationship with the bank's performance. The higher the
Lerner index, the higher the ROA. Because the high Lerner index indicates low competition,
the regression results show that lower competition is associated with higher profitability.
Based on some of the explanations above, it can be concluded that the high intensity of
competition can reduce the profitability of banks. In other words, the larger the Lerner index,
the higher the bank's profitability. Based on these explanations, the following hypotheses can
be submitted.
H1: Competition negatively affects bank profitability
Shadow Banking is a system of liquidity transformation and credit intermediation

involving several entities and their activities as a whole or partly conducted outside the
regular banking system. According to Tang & Wang (2016) on the theory of financial
innovation, shadow banking, as a form of financial innovation, can lower transaction costs
and taxes to increase returns. Second, shadow banking maintains lower capital requirements
and loss provisions, so that asset utilization efficiency can be improved to result in higher
returns. Third, in line with financial innovation, shadow banking can gain access to more
funds resources by transferring illiquid assets to liquid assets and in turn generating more
profits for banks. Schwarcz (2012), argues that shadow banking can reduce bank risk.
Because banks not only transfer part of the bank's credit risk to external investors but also
make those risks shared by the entire capital market through asset securitization. It also helps
banks increase their liquidity. Tang & Wang (2016) research found that the development of
shadow banking can improve the profitability of commercial banks.
In contrast to the research conducted by Diallo & Abdullah (2017) which examined
shadow banking, insurance, and financial sector stability. The results showed there is a
negative and significant influence of the insurance sector on financial stability that increases
in line with the increasing level of the shadow banking market in a country. So based on the
explanation above, hypotheses can be formulated as follows:
H2: Shadow Banking negatively affects banking profitability in Indonesia
Bank profitability is significantly influenced by bank size, bank liquidity, bank capital,
bank credit risk, bank efficiency, and bank diversification (Yong, 2017). One of the main
transactions of banking to increase profitability is credit lending transactions. In addition to
being the main source of income of banks, these lending transactions are very vulnerable to
risks that can be one of the main causes of banks getting problems and the worst thing faced
is going into bankruptcy. The risk in the common activity of lending is when the customer is
unable to pay his/her obligations to the creditor. Bank Indonesia Circular Letter
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No.13/24/DPNP/2011 states that credit risk is a risk due to the failure of the debtor and/or
other parties in fulfilling obligations to the Bank. NPL (Non-Performing Loan) is a measure
of the level of credit risk in this study. NPL risk demonstrates the ability of bank management
to manage non-performing loans provided by banks (Rachmana, Saudi, & Sinaga, 2019).
According to Tan's (2017) research higher volume of non-performing loans (NPLs)
increases bank costs and further leads to a decrease in bank profitability. In addition, Roman
and Danuletiu (Rachmana, 2019) also found that there is a negative relationship between
NPL and ROA.
H3a: Credit risk negatively and significantly affects banking profitability in Indonesia
The size or size of the company is the size or size of assets owned by the company.
Supriyono & Herdhayinta (2019) revealed that the size of the company is one of the factors
that affect the profitability of banks. This is because the size of the company will affect the
company's ability to bear the risks that may arise from various situations faced. According to
Supriyono & Herdhayinta (2019), large, well-established companies will be easier to obtain
capital in the capital market compared to small companies. The ease of access means large
companies have greater flexibility as well. The results of the research of Supriyono &
Herdhayinta (2019) and Ayadi and Ellouze (2013) found that the size of the company had a
positive and significant effect on the profitability of the bank.
H3b: The size of the company has a positive and significant effect on the profitability of
banks in Indonesia
Profitability is one of the important indicators commonly used to know the performance
of banks in gaining profits in a country in a certain period. The greater the value of
profitability, the more profit a banking company gets. The rapid competition in the financial
financing sector, both conducted by banks and non-banking financing, is necessary to
measure the level of competition. Competition level measurement is one of the common
ways to explain and give an idea of the real state of the competition. The Lerner Index is a
comprehensive measure of market strength as it integrates costs and revenues in one measure.
The Lerner Index is a measure of competition and shows market strength as the ratio between
revenue and cost differences to total revenue. This index has values ranging from 0-1. A
higher number or close to the value of 1 indicates great market strength and a low level of
competition. While in a competitive market, the Lerner index will have a value close to 0. In
addition to the level of competition, the emergence of Shadow Banking and some bank
determinants such as credit risk and bank size also influence banking profitability. The
relationship between Shadow Banking, competition, and banking determinants (credit risk
and bank size) with profitability can be seen in figure 1 as follows:
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Competition (X1)
H1
Shadow Banking (X2)

H2
H3a Profitability (Y)

Credit Risk
H3b
Size
Figure 1. Model Conceptual
2. Research Methods
2. 1.Population and Samples
This research is a case study conducted in conventional banking in Indonesia. This type of
research is survey research, using secondary data surveys obtained by conventional banks
listed on the Indonesia Stock Exchange. The survey research focuses on research that studies
the influence of competition and shadow banking on banking profitability in Indonesia. The
population is the total number of objects studied. The population studied in this study is
conventional banking listed on the Indonesia Stock Exchange during the period 2014-2019.
Sampling in this study using purposive sampling method with criteria such as the following:
a. Conventional banks that have data on financial statements and records of financial
statements that have been audited and published on the websites of each bank as well as
on the website of the Financial Services Authority
b. Conventional banks listed on the Indonesia Stock Exchange issued consecutive annual
reports during the period 2014-2019.
The type of data used is secondary data for all variables, namely conventional banking
financial ratios data listed on the Indonesia Stock Exchange as a benchmark of financial
performance that includes banking competition measured using the Lerner Index, Shadow
banking, and the profitability of conventional banks obtained from the Return On Asset
(ROA) level. This secondary data is obtained from the observation of conventional Bank
Financial Statements contained in the Annual Report from 2014-2019 at each bank. Based on
the results of the sample selection obtained by 35 banks as samples in this study.
2. 2.Variable Measurement
2.2.1. Independent Variables
Independent variables are variables that describe or affect other variables, this study uses
independent variables that include Competition (X1) and Shadow Banking (X2).
a. Competition (X1)
The measurement of the level of banking competition is measured using the Lerner Index
developed in 1934 by Abba Lerner. The Lerner Index is a price mark-up above its
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marginal cost and an indicator of market strength (Berger et al, 2009). This index has
values ranging from 0-1. A higher number or close to the value of 1 indicates great
market strength and a low level of competition. Conversely, if the value is close to the
number 0, the market forces are low and the level of competition is high. Refers to the
Lerner Index formulated by Berger et al (2009), formulated as follows:
Lernerit = (PTait - MCTait) / PTait

Description:
Lernerit = The level of competition of banks i at the time t.
PTait = The ratio of total revenue to total assets of the bank i at the time t.
MCTait = The bank's marginal cost to the total assets of the bank i at the time to t.
b. Shadow Banking (X2)

Shadow banking is a non-bank financial institution that provides similar services to
commercial banks such as financing, insurance, mutual funds, securities, and
cooperatives. Shadow banking assessment in this study was obtained from the amount of
credit financing provided by non-bank financial institutions during the period 2014-2019
based on the financial stability review issued by Bank Indonesia. Shadow banking
variables are measured using the Shadow banking ratio formula. The formula used to
measure the ratio of shadow banking is as follows:
SBR = NFC / TR
Description:
SBR = Shadow Banking Ratio
NFC =Net Fees and Commissions
TR = Total Revenue
c. Credit Risk
Credit risk is the main source of risk for banks because the bank's main function in
intermediation activities is credit distribution for the underfunded party (deficit). The
NPL ratio measures the risk of a bank's credit portfolio by looking at the debtor's failure
to meet its obligations. Changes to credit risk may reflect changes in the health of a
bank's credit portfolio, which will affect the performance of the bank (Rachmana et al,
2012).
Higher ratios show banks have higher levels of credit risk. In theory, higher volumes
of non-performing loans increase bank costs and further lead to a decrease in the bank's
profitability (Yong Tan, 2017).
𝑇𝑜𝑡𝑎𝑙 𝑁𝑜𝑛 − 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐶𝑟𝑒𝑑𝑖𝑡

𝑁𝑃𝐿 (𝑁𝑜𝑛 − 𝑃𝑒𝑟𝑓𝑜𝑟𝑚𝑖𝑛𝑔 𝐿𝑜𝑎𝑛) = × 100%
𝑇𝑜𝑡𝑎𝑙 𝐵𝑎𝑛𝑘 𝐿𝑜𝑎𝑛𝑠
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d. Bank Size
The size of the company is the size or size of assets owned by the company. Based on the
total assets owned by the size of the company are divided into three, namely large firms,
medium firms, and small firms. The size of the business is stated in the total assets and
log size (Supriyono & Herdhayinta, 2019). According to Supriyono & Herdhayinta
(2019) a large company whose shares are very widespread, any expansion of stock
capital will only have a small influence on the possibility of loss or shift of control from
the dominant party to the company concerned.
Size = LnTotalAsset
2.2.2. Dependent Variables

Dependent variables are variables described or influenced by independent variables,
dependent variables used in this study are Profitability measured using Return on Asset
(ROA). This ratio is used to measure the strength and weakness of the company in
generating its overall operating profit. Where ROA is calculated by using the formula of net
profit after tax divided by total assets.
The profitability level measurement in this study used Return On Asset (ROA) ratio.
ROA is used to measure the company's ability to generate overall profit. The greater the
ROA of a bank the greater the level of profit achieved by the bank and the better the
position of the bank in terms of the use of assets. This ratio can be written with formula as
follows:
𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑎𝑓𝑡𝑒𝑟
ROA = −𝑡𝑎𝑥 𝑡𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡 x 100%
2. 3.Data Analysis Methods

The hypothesis in this study was tested with multiple linear regressions with the following
regression equations:
Y= α +β1X1+ β2X2+β3X3+ β4X4 +e
Description:
Y = Profitability
X1 = Competition
X2 = Shadow Banking
X3 = Credit Risk
X4 = Size
β1,2,3,4 = Regression Coefficient
e = error
3. Results and Discussion

3.1. Results
To answer the hypothesis in this study using multiple regression analysis, to test the linear
abnormality of these multiple regression results have been tested for normality,
multicollinearity, and heteroskedasticity and the results used for the retrieval of this
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hypothesis have been free from the problem of linear unusuality (BLUE). The results of data
analysis with the SPSS 23 program can be seen in Table 1.
Table 1. Multiple Regression Analysis Results

Variables Coefficients t sign Decision
Constant -1.723
Learning Indeks 0.620 6.544 0.000 H1 accepted
Shadow Banking 0.202 0.617 0.538 H2 rejected
NPL -0,370 -5.543 0.000 H3a accepted
SIZE 0.258 4.098 0.000 H3b accepted
Based on the results of the regression analysis in Table 1, it can be concluded that
competition (learning index) has a positive and significant effect on profitability. Shadow
banking has a positive but insignificant effect on profitability. Credit risk (NPL) negatively
and significantly affects profitability, and the size of the company positively and significantly
affect profitability.
3.2. Discussion
Profitability is one of the important indicators commonly used to know the performance of
banks in gaining profits in a country in a certain period. The greater the value of profitability,
the more profit a banking company gets. The rapid competition in the financial financing
sector, both conducted by banks and non-banking financing, is necessary to measure the level
of competition. Competition level measurement is one of the common ways to explain and
give an idea of the real state of the competition. The Lerner Index is a comprehensive
measure of market strength as it integrates costs and revenues in one measure. The Lerner
Index is a measure of competition and shows market strength as the ratio between revenue
and cost differences to total revenue. This index has values ranging from 0-1. A higher
number or close to the value of 1 indicates great market strength and a low level of
competition. While in a competitive market, the Lerner index will have a value close to 0. In
addition to the level of competition, the emergence of Shadow Banking, and some bank
determinants such as credit risk, the size of the bank also influence the profitability of banks.
The results of the analysis of the relationship between competition, shadow banking, other
determinant factors with profitability can be explained in the following discussion.
Competition is a condition where several parties compete for something. In a competitive
market, banks have little market power. The magnitude of market forces in the banking sector
will cause banks to increase lending interest rates to gain high profitability. Hope (2013)
found that there is a positive relationship between market forces as measured by the Lerner
index and ROA. The results of this study show that competition has a positive and significant
effect on the profitability of banks in Indonesia. The positive influence shows that the higher
competition between banks further improves the bank's performance, the results of this study
support research conducted by Hope (2013) and Yuanita (2019). However, the results of this
study do not support research conducted by Chortareas (2011) and Febrina (2015) that found
the opposite relationship.
According to Chortareas (2011), competitive markets resulted in a low spread in the
Latin American banking sector. Bank profitability is influenced by the intensity of
E-ISSN: 2614-1280 P-ISSN 2622-4771
competition in the banking market, this has been proven by Smith (Febrina, 2015) who found
a decrease in profitability in the banking industry with a high level of competition. Yuanita
(2019) uses the Lerner index for competition measurement. The regression results show that
the Lerner index has a positive relationship with the bank's performance. The higher the
Lerner index, the higher the ROA. Because the high Lerner index indicates low competition,
the regression results show that lower competition is associated with higher profitability.
Shadow Banking is a system of liquidity transformation and credit intermediation
involving several entities and their activities as a whole or partly conducted outside the
regular banking system. According to Tang & Wang (2016) on the theory of financial
innovation, shadow banking, as a form of financial innovation, can lower transaction costs
and taxes to increase returns. Second, shadow banking maintains lower capital requirements
and loss provisions, so that asset utilization efficiency can be improved to result in higher
returns. Third, in line with financial innovation, shadow banking can gain access to more
funds resources by transferring illiquid assets to liquid assets and in turn generating more
profits for banks. Schwarcz (2012) argues that shadow banking can reduce bank risk.
Because banks not only transfer part of the bank's credit risk to external investors but also
make those risks shared by the entire capital market through asset securitization. It also helps
banks increase their liquidity. The results of this study show that shadow banking has a
positive but insignificant effect on profitability. The results of this study support the direction
of the relationship with Tang & Wang (2016) research found that the development of shadow
banking can improve the profitability of commercial banks. But it is different from the
research conducted by Diallo & Abdullah (2017) which examined shadow banking,
insurance, and financial sector stability. The results showed there is a negative and significant
influence of the insurance sector on financial stability that increases in line with the
increasing level of the shadow banking market in a country.
Bank profitability is significantly influenced by bank size, bank liquidity, bank capital,
bank credit risk, bank efficiency, and bank diversification (Yong, 2017). One of the main
transactions of banking to increase profitability is credit lending transactions. In addition to
being the main source of income of banks, these lending transactions are very vulnerable to
risks that can be one of the main causes of banks getting problems and the worst thing faced
is going into bankruptcy. The risk in a common crediting activity is when the customer is
unable to pay his/her obligations to the creditor. Credit risk is a risk due to the failure of the
debtor and/or other parties in fulfilling obligations to the Bank (Rachmana et al, 2019). NPL
(Non-Performing Loan) is a measure of the level of credit risk in this study. NPL risk
demonstrates the ability of bank management to manage non-performing loans provided by
banks (Rachmana et al, 2019). The results of this study show that credit risk negatively and
significantly affects the profitability of banks in Indonesia. The negative influence indicates
that the higher the NPL the bank will further decrease the profitability of banks in Indonesia.
The results of this study support Tan's (2017) research higher volume of non-performing
loans (NPLs) increases bank costs and further leads to a decrease in bank profitability. In
addition, Rachmana et al (2019) also found that there is a negative relationship between NPL
and ROA.
The size or size of the company is the size or size of assets owned by the company.
Supriyono & Herdhayinta (2019) revealed that the size of the company is one of the factors
that affect the profitability of banks. This is because the size of the company will affect the
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company's ability to bear the risks that may arise from various situations faced. According to
Supriyono & Herdhayinta (2019), large, well-established companies will be easier to obtain
capital in the capital market compared to small companies. The ease of access means large
companies have greater flexibility as well. The results of this study found that the size of the
company has a positive and significant effect on the profitability of banks in Indonesia. The
positive influence indicates that the larger the size of the bank will increase its profitability,
this is because with large asset ownership it will be easier for the bank to grow its business.
The results of this study supported the research of Supriyono & Herdhayinta (2019) and
Ayadi and Ellouze (2013) found that the size of the company had a positive and significant
effect on the profitability of the bank.
4. Conclusion
Profitability is one of the important indicators commonly used to know the performance of
banks in gaining profits in a country in a certain period. The greater the value of profitability,
the more profit a banking company gets. It is therefore very important to know the factors
that affect the profitability of the bank. The results of the analysis in this study show that
competition and company size has a positive and significant effect on the profitability of
banks. Credit risk negatively and significantly affects bank profitability, while shadow
banking has a positive but insignificant effect on bank profitability. Based on these results, it
can be concluded that the level of competition, ownership of assets, and risk of bad credit
greatly affect the profitability of the bank.
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Influence of Competition and Shadow Banking On Banking Profitability in Indonesia

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Influence of Competition and Shadow Banking On Banking Profitability in Indonesia

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International Journal of Economics, Business and Accounting Research (IJEBAR)

Peer Reviewed – International Journal

INFLUENCE OF COMPETITION AND SHADOW BANKING ON

Baetyka Nur Rifawati

Keywords: competition, shadow banking, bank profitability

Profitability is the most important indicator for measuring a bank's financial

H1: Competition negatively affects bank profitability

Shadow Banking is a system of liquidity transformation and credit intermediation

H2: Shadow Banking negatively affects banking profitability in Indonesia

Shadow Banking (X2)

H3a Profitability (Y)

Figure 1. Model Conceptual

Lernerit = (PTait - MCTait) / PTait

b. Shadow Banking (X2)

𝑇𝑜𝑡𝑎𝑙 𝑁𝑜𝑛 − 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐶𝑟𝑒𝑑𝑖𝑡

2.2.2. Dependent Variables

2. 3.Data Analysis Methods

Y= α +β1X1+ β2X2+β3X3+ β4X4 +e

3. Results and Discussion

Table 1. Multiple Regression Analysis Results

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